Regis Corporation 2007 Annual Report
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2007 ANNUAL REPORT Regis Corporation (NYSE:RGS) is the beauty industry’s global leader in beauty salons, hair restoration centers and cosmetology education. As of June 30, 2007, the Company owned, franchised or held ownership interests in over 12,400 worldwide locations. Regis’ corporate and franchised locations operate under concepts such as Supercuts, Jean Louis David, Vidal Sassoon, Regis Salons, MasterCuts, Trade Secret, SmartStyle, Cost Cutters and Hair Club for Men and Women. In addition, Regis maintains ownership interests in various other salon concepts such as Cool Cuts 4 Kids, and the Beauty Takashi and Beauty Plaza concepts in Japan. System-wide, these and other concepts are located in the U.S. and in eleven other countries in North America, Europe and Asia. Regis also maintains a 50 percent ownership interest in Intelligent Nutrients, a joint venture that provides a wide variety of certified organic products for health and beauty. Financial Highlights For the Five Years Ended June 30, (Dollars in thousands, except per share amounts) 2007 2006 2005 2004 2003 For the Year: Revenues: Service $1,793,802 $1,634,028 $1,466,336 $1,271,232 $1,117,562 Product $ 752,280 $ 718,942 $ 648,420 $ 578,279 $ 499,286 Franchise $ 80,506 $ 77,894 $ 79,538 $ 73,632 $ 67,682 $2,626,588 $2,430,864 $2,194,294 $1,923,143 $1,684,530 Same-store sales 0.2% 0.4% 0.9% 2.6% 1.2% Operating income $ 164,613 $ 204,491 $ 137,890 $ 178,748 $ 157,113 Net income $ 83,170 $ 109,578 $ 64,631 $ 104,218 $ 85,555 Net income per diluted share $ 1.82 $ 2.36 $ 1.39 $ 2.26 $ 1.89 Cash flow from operations $ 241,860 $ 281,685 $ 215,731 $ 205,664 $ 151,119 At Year End: Total assets $2,132,114 $1,985,324 $1,725,976 $1,271,859 $1,112,955 Long-term debt, including current portion $ 709,231 $ 622,269 $ 568,776 $ 301,143 $ 301,757 Total shareholders’ equity $ 913,308 $ 871,407 $ 754,712 $ 682,020 $ 558,526 Number of employees worldwide 62,000 59,000 55,000 53,600 49,000 Location Data: North America 10,160 9,624 9,040 8,148 7,591 International 2,256 2,044 2,022 2,014 2,026 Total 12,416 11,668 11,062 10,162 9,617 Key Ratios: Gross margin percentage 45.2% 44.8% 44.6% 44.7% 45.1% Operating margin percentage 6.3% 8.4% 6.3% 9.3% 9.3% Debt-to-capitalization ratio 43.7% 41.7% 43.0% 30.6% 35.1% 2 To Our Shareholders, I’vebeeninthebeautybusinessfor40years,andinallthattimecannotrememberany four-yearperiodwhenourindustryhasbeensochallenged.Thisenvironmentpersistedin 2007, with a variety of factors combining to produce results that were below our historical growthrate.Longterm,wearejustasbullishasever.Thisisagreatreplenishment business:lowriskfactors,noforeigncompetition,noriskoftechnologicalobsolescence, and tremendous demographics—as the Baby Boomers age, they wear their hair shorter andhavetheirhaircoloredmoreoften. Althoughthishasbeenatoughtimeinourindustry,wehaverespondedaccordingly.Iftherewasany centralthemetoourbusinessin2007,itwasthis:focus. Wedidnotstandstillwhiletheseconditions persisted,andin2007weintensifiedoureffortstostreamlineourbusiness,bothoperationallyand organizationally, and positioned ourselves for solid improvements on a number of fronts in preparation for 2008 and beyond. During the year: • We launched programs to better control expenses; • We made an important investment in the Far East, establishing a foothold in Japan that will allow us to leverage our presence there; • We established a significant long-term strategic relationship with Horst Rechelbacher, a visionary and an icon in our industry, to develop our first proprietary line of organic, professional products; and • We looked hard at our core competencies and took the necessary steps to focus on what we do best. ANew,CompellingBeautySchoolModel Organizationally, the most significant of our actions in 2007 was the decision in April to merge our 51 beauty schools with the 37 schools operated by the Empire Education Group, based in Pennsylvania. This newenterprise,inwhichwemaintainapproximately50percentownership,createsthelargestproviderof cosmetology education in North America, with 88 schools in 18 states educating approximately 10,000 graduates per year, a merger that will double the number of beauty school graduates available to us. We view this new business combination as a powerful affirmation of our commitment to the beauty school business and its future enhanced profitability. In addition, this merger demonstrates ourdedicationtocosmetologyeducationandourstrategicgoalofattractingthebesttalentavailableto oursalons.ThefinancialstrengthweaddtoEmpireandEmpire’sexpertiseinoperatingcosmetology schools constitute a win-win for both companies, allowing us to focus more closely on what we do best whilehelpingusbuildforthefuturebygivingusaccesstotheindustry’smosttalentedyoungstylists. Using Our Capital to Build Shareholder Value We have always believed that building and acquiring salons is the long-term strategy that provides the greatest returns to our shareholders. However, as with many other retailers, including Wal-Mart, The Home Depot and others, we have looked closely at our store expansion plans and made the decision to moderate our near-term growth. We fully expect our same-store sales to return to morehistoricallevelsandwhentheydo,ourinvestmentinnewsalonswillincreaseaccordingly.Inthe meantime,ourstrongfinancialpositionandconfidenceintheunderlyingstrengthofourbusinessallow us to return value to our shareholders through a share repurchase program. In 2007 we completed a $100 million stock repurchase program and our intention is to repurchase up to an additional $100 million in fiscal 2008. Thisisnottosaywedidn’tgrowinfiscal2007.Duringtheyearwebuilt422newstoresandhadanet increase of 583 corporate-owned locations over the prior year. Our franchisees built 256 locations and we closed,soldorrelocated387.Company-ownedlocationsasoftheendofthefiscalyearnumbered8,244. Akeypartofourgrowthremainedfocusedonourtop-performingWal-MartSmartStylestores,where webuilt242unitsduringtheyear,bringingthetotalbaseofSmartStylestoresto2,000attheendof the year, an increase of 15 percent over fiscal 2006. Our Wal-Mart presence will remain an important partofourstoreconstructionprograminfiscal2008aswell. Service: An Improving Outlook Asweconsidertheservicecomponentofthebusiness,forthefirsttimeinseveralyearswecansee improvement. This is consistent with our prediction more than a year ago that service comps would start firmingupbecausekey,influentialcelebritieswerestartingtoadoptshorterstyles.Whilestillbelowour traditional growth rate of 2.5 to 4.5 percent, more of our customers seem to be following suit and through- out the year we experienced a steady improvement in our service comps, finishing out the year with system-wide service comps that overall improved 1.0 percent year over year. 5 At the same time, we also focused on the continued popularity of long hairstyles. We initiated programs to boost average ticket prices. This included heightened marketing campaigns, additional training to promote our expertise in longer hairstyles and hair extensions for clients who want instant volume and length. Product: New Realities, New Challenges Product sales, which comprise 29 percent of our revenues, presented a challenge in 2007. Product compari- sons against 2006 results were more difficult in light of our decision in 2006 to deeply discount several lines that had been repackaged, boosting sales in that period. Diversion—the sale of professional products by mass merchants—continues to be a challenging factor. Wehaverespondedtotheseconditionsinseveralways.First,welaunchedaloyaltyprograminourTrade Secret division, and in less than a year signed up more than 800,000 customers. We changed some of our compensation metrics to provide better incentives for our stylists to recommend products to their clients. Indeed, we see this as a huge competitive advantage: Mass merchants do not have 62,000 hair stylists recommending specific products to their customers. A customer’s relationship with his or her stylist isarelationshipoftrust,sowebelievethatinthelong-termwehavetheopportunitytocontinueto buildastrongandgrowingretailproductbusiness. We are very excited about our collaboration with Horst Rechelbacher to develop Intelligent Nutrients, a new proprietary line of organic hair products that will be revolutionary to the hair- care industry. We’reinthefinalstagesofresearchanddevelopmentandweexpectthatthehair-careline should be available during the spring of 2008. Finally, we are seeing signs that the diversion of professional product into the mass merchandising market is abating. Paul Mitchell, Joico and Graham Webb continue to make positive headway and we are heartened by the commitment of Procter & Gamble to reduce the quantities of professional product inventories stocked by mass merchants and make major investments to develop and enhance their professional brands. Growth: Exploiting New Opportunities As we look ahead, we are encouraged by our opportunities for growth. The fiscal 2007 performance of theHairClubforMenandWomenisexcellent.WeexperiencedstrongincreasesinbothEBITDAand netincomeinthissegmentduringtheyear.OuracquisitionpipelineremainsfullandinJuneof2007,we made a significant salon acquisition, acquiring 175 Fiesta Salons with over $44 million in annual revenues. Finally, we established a foothold in Japan by purchasing a minority portion of Goldman Sachs’ invest- mentintheBeautyTakashiandBeautyPlazahairsalons.Thisstephassignificancewellbeyonditssize. WenowhaveamanagementplatforminJapanandAsiaandwillbepreparedforanyWal-Mart